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H.R. 1231, MAKING HEALTH CARE MORE AFFORDABLE: EXTENDING PREMIUM CONVERSION TO

FEDERAL RETIREES

HEARING

BEFORE THE

SUBCOMMITTEE ON CIVIL SERVICE

AND AGENCY ORGANIZATION

OF THE

COMMITTEE ON GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

ON

H.R. 1231

TO AMEND THE INTERNAL REVENUE CODE OF 1986 TO ALLOW FEDERAL CIVILIAN AND MILITARY RETIREES TO PAY HEALTH INSURANCE PREMIUMS ON A PRETAX BASIS AND TO ALLOW A DEDUCTION

FOR TRICARE SUPPLEMENTAL PREMIUMS

JULY 9, 2003

Serial No. 108–66

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpo.gov/congress/house

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

TOM DAVIS, Virginia, Chairman

DAN BURTON, Indiana

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

DOUG OSE, California

RON LEWIS, Kentucky

JO ANN DAVIS, Virginia

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

ADAM H. PUTNAM, Florida

EDWARD L. SCHROCK, Virginia

JOHN J. DUNCAN, JR., Tennessee

JOHN SULLIVAN, Oklahoma

NATHAN DEAL, Georgia

CANDICE S. MILLER, Michigan

TIM MURPHY, Pennsylvania

MICHAEL R. TURNER, Ohio

JOHN R. CARTER, Texas

WILLIAM J. JANKLOW, South Dakota

MARSHA BLACKBURN, Tennessee

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

CHRIS VAN HOLLEN, Maryland

LINDA T. SANCHEZ, California

C.A. ‘‘DUTCH’’ RUPPERSBERGER, Maryland

ELEANOR HOLMES NORTON, District of

Columbia

JIM COOPER, Tennessee

CHRIS BELL, Texas

———

BERNARD SANDERS, Vermont

(Independent)

PETER SIRH, Staff Director

MELISSA WOJCIAK, Deputy Staff Director

ROB BORDEN, Parliamentarian

TERESA AUSTIN, Chief Clerk

PHILIP M. SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON CIVIL SERVICE AND AGENCY ORGANIZATION

JO ANN DAVIS, Virginia, Chairwoman

TIM MURPHY, Pennsylvania

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

ADAH H. PUTNAM, Florida

NATHAN DEAL, Georgia

MARSHA BLACKBURN, Tennessee

DANNY K. DAVIS, Illinois

MAJOR R. OWENS, New York

CHRIS VAN HOLLEN, Maryland

ELEANOR HOLMES NORTON, District of

Columbia

JIM COOPER, Tennessee

EX OFFICIO

TOM DAVIS, Virginia HENRY A. WAXMAN, California

RONALD MARTINSON, Staff Director

B. CHAD BUNGARD, Deputy Staff Director and Senior Counsel

CHRISTOPHER BARKLEY, Clerk

TANIA SHAND, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on July 9, 2003 ................................................................................. 1

Text of H.R. 1231 ..................................................................................................... 4

Statement of:

Davis, Hon. Tom, a Representative in Congress from the State of Virginia ............................................................................................................... 9

Fallis, Charles L., president, National Association of Retired Federal

Employees; Sue Schwartz, Deputy Director of Government Relations,

Military Officers Association of America; and William H. Young, president, National Association of Letter Carriers ............................................ 21

Letters, statements, etc., submitted for the record by:

Davis, Hon. Danny K., a Representative in Congress from the State

of Illinois, prepared statement of ................................................................ 51

Davis, Hon. Jo Ann, a Representative in Congress from the State of

Virginia:

Prepared statement of ............................................................................... 3

Prepared statement of Walter Olihovik, national president, National

Association of Postmasters of the United States ................................ 18

Davis, Hon. Tom, a Representative in Congress from the State of Virginia, prepared statement of ........................................................................ 12

Fallis, Charles L., president, National Association of Retired Federal

Employees, prepared statement of .............................................................. 23

Schwartz, Sue, Deputy Director of Government Relations, Military Officers Association of America, prepared statement of .................................. 34

Young, William H., president, National Association of Letter Carriers,

prepared statement of ................................................................................... 42

(1)

H.R. 1231, MAKING HEALTH CARE MORE AFFORDABLE: EXTENDING PREMIUM CONVERSION TO FEDERAL RETIREES

WEDNESDAY, JULY 9, 2003

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON CIVIL SERVICE AND AGENCY

ORGANIZATION,

COMMITTEE ON GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 2 p.m., in room

2247, Rayburn House Office Building, Hon. Jo Ann Davis of Virginia (chairwoman of the subcommittee) presiding.

Present: Representatives Jo Ann Davis of Virginia, Blackburn,

and Van Hollen.

Staff present: Ronald Martinson, staff director; B. Chad Bungard,

deputy staff director and senior counsel; John Landers, detailee;

Vaughn Murphy, legislative counsel; Robert White, director of communications; Christopher Barkley, clerk; Tania Shand, minority

professional staff member; and Teresa Coufal, minority assistant

clerk.

Mrs. DAVIS OF VIRGINIA. The Subcommittee on Civil Service and

Agency Organization will come to order.

This hearing represents an important step in our efforts to extend premium conversion, or the ability to pay for health care premiums with pre-tax money, to Federal retirees, military retirees,

and active duty military personnel. This is a benefit that is widely

available in the private sector, and has been available to executive

branch Federal employees since October 2000.

This is a matter of equity. The Federal Government has a long

history of treating our active employees and retirees the same.

They have access to the same health care, why shouldn’t they have

the same ability to pay their premiums with before tax dollars?

And why shouldn’t our military personnel be able to do the same

for their TRICARE programs?

This is also a matter of fairness. Health care premiums are skyrocketing for everyone, but no one feels this pressure more than

people on a fixed income. The average Federal pension check is less

than $1,900 per month. Last year’s Federal cost-of-living increase

was just 1.4 percent. Over the last 6 years, premiums in the Federal Employees Health Benefits Plans have jumped at least 8 percent a year, almost completely off-setting the small COLA increases.

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I am honored to be an original cosponsor of H.R. 1231, the legislation that would extend premium conversion to the entire Federal

family. In past years, this proposal has died an anonymous death

because it was not referred here but to the Ways and Means Committee, which never gave it serious consideration. This year Chairman Tom Davis, the House bill’s sponsor, who is with us here

today as our first witness, and Senator John Warner, the chief

sponsor on the other side of the Capitol, crafted the legislation in

such a way as to ensure a joint referral to the Government Reform

Committee. This enables us to hold this hearing today, and to shed

some light on this critical subject.

Congress recognizes the burden Americans face due to the rising

cost of health care. Already this year we have taken a bold step in

adding a prescription drug benefit to Medicare. And just yesterday,

many of us went to the floor to ensure passage of legislation that

holds Federal retirees harmless when this new drug benefit goes

into effect. It is only appropriate that we now turn our attention

to the issue of premium conversion for the entire Federal family as

the next step in our efforts.

[The prepared statement of Hon. Jo Ann Davis and the text of

H.R. 1231 follows:]

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Mrs. DAVIS OF VIRGINIA. I thank you, and I would like to now

recognize the chairman of our Government Reform Committee.

Mr. TOM DAVIS OF VIRGINIA. Tom Davis. [Laughter.]

Mrs. DAVIS OF VIRGINIA. I was just asking if I needed to swear

you in to make you honest. [Laughter.]

Mr. TOM DAVIS OF VIRGINIA. Oath of office swears us in. We’re

done.

Mrs. DAVIS OF VIRGINIA. You’re done.

Mr. TOM DAVIS OF VIRGINIA. The oath of office swears Members

in.

Mrs. DAVIS OF VIRGINIA. Why don’t we start with you then, Mr.

Davis, Mr. Chairman. Thank you.

Mr. TOM DAVIS OF VIRGINIA. Thank you. If you forget who anybody is today, it is Davis. It is Davis, Davis——

Mrs. DAVIS OF VIRGINIA. I know who you are.

Mr. TOM DAVIS OF VIRGINIA. I know. I know that. And I am

happy you are where you are, Jo Ann.

STATEMENT OF HON. TOM DAVIS, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF VIRGINIA

Mr. TOM DAVIS OF VIRGINIA. Madam Chairman and members of

the subcommittee, I really appreciate the opportunity to come before you today to discuss this issue for our Nation’s military and

civil servants.

I know I am preaching to the choir this afternoon, but I am

pleased to see all but two members of this subcommittee as cosponsors of the legislation this year. Although we all know full well the

deliberative nature of Congress, it has been 1,152 days since I first

introduced premium conversion legislation, and I am pleased to finally have the ability to testify on this issue. And for that, we

thank you, Madam Chairwoman.

As you know, we have introduced legislation in the 108th Congress to allow Federal civilian and military annuitants to pay their

Federal Employees Health Benefits Program premiums on a pretax basis, and allow active duty military personnel to apply a below

the line deduction for TRICARE supplemental premiums paid annually. Although not an answer to rising health care costs, H.R.

1231 will take the next step in helping to improve the quality of

life for those retirees and active duty personnel living on a fixed

income.

I first introduced this legislation in the 106th Congress, and was

pleased to receive the support of 111 of our colleagues at that time.

In the 107th Congress, H.R. 2125 received even broader bipartisan

support, yet despite 282 cosponsors, was never acted upon. I am

pleased to say that we have moved quickly in the 108th Congress,

and in the first 6 months have surpassed our total from the last

Congress, with 283 cosponsors to date.

The FEHBP covers 8.6 million individuals, including 2.2 million

Federal and postal employees, 1.9 million Federal annuitants, and

4.5 million dependents. All of us here today recognize the importance of the FEHBP as we seek to retain and recruit the best and

the brightest to serve our Nation as members of the Civil Service.

Deputy Director Blair pledged late last year to work closely with

the members of the Government Reform Committee, as well as proVerDate 11-MAY-2000 10:19 Nov 20, 2003 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 D:\DOCS\89968.TXT HGOVREF1 PsN: HGOVREF1
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viders and plan participants, to keep the FEHBP a model for employer-provided health care coverage. OPM has continued this commitment, and I firmly believe that our legislation will be integral

to this effort.

Under current law, amounts distributed from a section 401(a)

qualified plan and used to pay for benefits in a former employer’s

section 125 cafeteria must be included in the participant-retiree’s

income. Section 402(a) stipulates that distributions from a qualified

plan are taxable to the distributee in the taxable in which distributed, except for two instances stated in the statute. Current exemptions include distributions made to a spouse or former spouse

under court order, and eligible rollover distributions transferred

within 60 days.

In 1959, Congress created the Federal Employees Health Benefits Plan [FEHBP] as a recruitment and retention tool for the Federal Government to compete in the job market. There is no disputing that Federal employees, retirees, and their survivors enjoy the

widest selection of health plans in the country, enabling users to

compare the costs, benefits, and features of different plans. Marketorientation and consumer choice have been hallmarks of the program’s success. And although OPM has been more successful than

private sector plans at constraining costs, the numbers tell us that

our annuitants are losing more and more of their monthly paychecks to health care premiums.

According to GAO, FEHBP premiums have increased by an average of nearly 10 percent a year since 1998, a trend which promises

to continue in the near future given the increased costs for prescription drugs and outpatient care. Conversely, COLAs have only

increased by 2.38 percent for CSRS and 1.96 percent for FERS over

the last 5 years. It is critical for annuitants to receive relief since

they have been forced in recent years to shoulder increasingly high

health insurance and prescription drug costs on their average

monthly annuity of $1,869 and average annual annuity of $22,428.

It has been estimated this legislation would result in a savings of

approximately $434 a year. For some, this could mean an annual

utility bill or car insurance payment, for others it could mean airfare to see their family. Regardless of the choice, a modest amount

of money to those on a fixed income will have a substantial impact.

In addition, this legislation is important to establish parity between employees and retirees. OPM made administrative changes

and began offering premium conversion plans to executive branch

employees in October 2000 and Congress extended the tax benefit

to legislative branch workers in January 2001. This option must be

made available to those whose income is fixed and whose medical

costs are on average much higher than current employees. In fact,

yesterday the House reaffirmed parity between retirees and current employees with the passage of H.R. 2631, Madam Chairwoman, legislation which we sponsored together. This legislation

represents the Federal Government’s commitment that our annuitants will remain on equal footing with current employees with regard to prescription drug benefits. This commitment must also be

made in terms of providing the premium conversion benefit to our

annuitants.

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In conclusion, now more than ever is the time to show our appreciation to those men and women who have and continue to dedicate

their lives to our Nation and our ideals. Our Nation’s tax code, although arcane and complex, has many built-in incentives that assist individual taxpayers in areas our Nation holds most dear, such

as education, philanthropy, and health care. I can think of few priorities as dear as providing appropriate health care for our retirees

and our active duty military. It is my hope that this legislation will

be enacted in the 108th Congress. I will continue to work to ensure

its passage.

I appreciate the subcommittee taking a look at this issue today

and look forward to working with all of you as we remain vigilant

in our efforts to provide the best for our Federal civilian and military employees and annuitants. Thank you very much.

[The prepared statement of Hon. Tom Davis follows:]

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Mrs. DAVIS OF VIRGINIA. Mr. Chairman, we are delighted to have

had you here to testify today. And by tradition, we do not question

Members of Congress who testify before the committee. So I thank

you again, Chairman Davis, for taking the time.

Mr. TOM DAVIS OF VIRGINIA. Jo Ann, you always have ample opportunity to ask me questions off-stage.

Mrs. DAVIS OF VIRGINIA. I know where I can get you.

Mr. TOM DAVIS OF VIRGINIA. So I will be happy to help as we

work through this. I just appreciate your willingness to hold this

hearing and try to move this at least on a fast-track through this

committee where we will face additional obstacles, but we will try

to work through them. Thank you very much.

Mrs. DAVIS OF VIRGINIA. Thank you, Mr. Chairman.

We are going to go ahead and proceed. We should have a Member or two show up here shortly.

I ask unanimous consent that all Members have 5 legislative

days to submit written statements and questions for the hearing

record, and that any answers to written questions provided by the

witnesses also be included in the record. Without objection, it is so

ordered.

I also ask unanimous consent that all exhibits, documents, and

other materials referred to by Members and the witnesses may be

included in the hearing record, and that all Members be permitted

to revise and extend their remarks. Without objection, it is so ordered.

Before we begin, I do want to enter into the record a statement

from Walter Olihovik, the national president of the National Association of Postmasters of the United States. Without objection, it is

so ordered.

[The prepared statement of Mr. Olihovik follows:]

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Mrs. DAVIS OF VIRGINIA. If our second panel of witnesses,

Charles L. Fallis, president of the National Association of Retired

Federal Employees; Sue Schwartz, deputy director of government

relations for the Military Officers Association of America; and William H. Young, president of the National Association of Letter Carriers, if you all would come forward and remain standing, I will administer the oath. It is the subcommittee’s standard of practice to

ask witnesses to testify under oath. If you will raise your right

hands.

[Witnesses sworn.]

Mrs. DAVIS OF VIRGINIA. Let the record reflect that the witnesses

have answered in the affirmative. You may be seated.

The panel will now be recognized for an opening statement. We

will ask you to summarize your testimony in 5 minutes. Any more

complete statements you may wish to make will be included in the

record.

I would like to welcome Charles Fallis, president of NARFE. I

thank you for being with us today. And I am going to recognize you

first, Mr. Fallis, for 5 minutes.

STATEMENT OF CHARLES L. FALLIS, PRESIDENT, NATIONAL

ASSOCIATION OF RETIRED FEDERAL EMPLOYEES; SUE

SCHWARTZ, DEPUTY DIRECTOR OF GOVERNMENT RELATIONS, MILITARY OFFICERS ASSOCIATION OF AMERICA;

AND WILLIAM H. YOUNG, PRESIDENT, NATIONAL ASSOCIATION OF LETTER CARRIERS

Mr. FALLIS. Thank you. On behalf of the Nation’s 2.3 million

Federal annuitants, I am happy to testify today in support of H.R.

1231 and S. 623, bills that were introduced by Representative Tom

Davis and Senator John Warner. I also want to commend you,

Chairwoman Davis, for holding, for the first time ever, hearings on

this premium conversion issue that is so important to us. I want

to thank you for the lengths that you have gone out of way to ensure the health and economic well-being of Federal retirees.

I think the reasons are clear why these bills should become law.

Premiums for plans available for the Federal Employees Health

Benefits Program have skyrocketed ever since 1998. It was these

double digit premiums, these hikes that helped persuade OPM to

revisit and reconsider earlier interpretations that Section 125 of

the Internal Revenue Code did not apply to the Federal Government as an employer. And as a result of those reconsiderations, the

premium conversion benefit was granted first to executive branch

employees in October 2000 and then, thereafter, to legislative

branch employees in January 2001.

We are glad, of course, that our colleague who are still working

receive this relief, but, of course, we were understandably disappointed that annuitants were left out. We believe very strongly

that, as a matter of fairness and equity, Federal annuitants should

be included and should have equal relief. Annuitants live on fixed

incomes, and much of the meager cost-of-living increases that were

received during the last 6 years were eroded substantially by the

premium increases. The reality is that most of the 2003 average

COLA of $26 was immediately consumed by these premium increases.

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But it is not just retirees who should care about this legislation.

Indeed, imagine the shock of a newly retired homeland security

worker when he or she retires and receives a first annuity check

and learns that the Federal Government does not permit Federal

retirees pre-tax earnings to pay for their share of health premiums.

The result of that is that about a $434 savings which was there

during the work years is lost immediately upon retirement, at a

time when it is needed the most.

It will be a rude awakening for today’s active Federal and postal

worker to learn that this inequity will continue unless the Davis

and Warner bills are passed. For that reason, I am grateful to the

Federal, postal, and military organizations, including those who are

testifying here with me today, for the strong support they have

given to H.R. 1231 and S. 623.

On the downside, some lawmakers have expressed concerns that

the proposed legislation, premium conversion, would be extended

only to Federal retirees and not to all other retirees. Well, NARFE

suggests that, because of their service to their country, providing

premium conversion rights to Federal and military retirees is a

reasonable first step toward providing it to all retirees.

The Congressional Joint Committee on Taxation says that premium conversion legislation, when fully implemented, would cost

$7.1 billion over 10 years. NARFE certainly is sensitive to the cost

of legislation, particularly in light of the Federal budget deficit.

Nonetheless, we also recognize that several proposals to use the tax

code to help other Americans absorb skyrocketing health care costs

are currently receiving favorable consideration, and we do not believe that H.R. 1231 and S. 623 are out of line in that connection.

Higher health insurance premiums have hit everyone in the Federal community, employees and retirees alike. That is why everyone who serves our country, including Federal and military retirees, should receive equal tax relief to make health insurance more

affordable for all.

We commend Congressman Tom Davis, Senator John Warner,

and you, Chairwoman Davis, along with actually about 282 Members of the House, for recognizing that retirees, too, are struggling

with rising health costs just as our other citizens.

So, thank you again, Chairwoman Davis, for holding this hearing. I can assure you of NARFE’s full support and cooperation in

moving H.R. 1231 to the floor of the House as soon as possible.

Thank you very much.

[The prepared statement of Mr. Fallis follows:]

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Mrs. DAVIS OF VIRGINIA.. Thank you, Mr. Fallis.

We have been joined by my colleague, Ms. Blackburn from Tennessee. Ms. Blackburn, did you have an opening statement?

Ms. BLACKBURN. No, ma’am, I do not. I appreciate the opportunity to step in for just a few moments and be with you all. I

think we are all interested in this, interested in seeing it move forward, but we have been in the middle of a day-long markup in Judiciary. Thank you, Madam Chairman.

Mrs. DAVIS OF VIRGINIA. Thank you, Ms. Blackburn. Unfortunately, that is the problem with several of our colleagues today,

there are meetings on top of meetings, as it so often happens here

on the hill.

I would now like to recognize Sue Schwartz of the Military Officers Association of America. I want to thank you, Ms. Schwartz, for

being here today. You have 5 minutes.

Ms. SCHWARTZ. Good afternoon, Madam Chairwoman and distinguished members of the subcommittee. The Military Officers Association of America [MOAA] is grateful for the invitation to present

our views on H.R. 1231 and S. 623, to allow active duty

servicemembers and Federal civilian and military retirees and survivors to pay health insurance premiums on a pre-tax basis and to

allow a deduction for TRICARE supplemental premiums.

Madam Chairman, we are also most appreciative of your leadership as an original cosponsor of H.R. 1231, as well as for your continued support for equity in the treatment of uniformed services

and Federal employees. H.R. 1231 would allow 8.6 million current

and retired military servicemembers, their families, and survivors

the same privilege already enjoyed by millions of other Americans.

Many uniformed services beneficiaries, active duty, including

Ready Reservists and National Guardsmen, and retirees, pay premiums for a variety of health programs. For the vast majority of

military beneficiaries, these are not tax deductible because their

health care expenses do not exceed 7.5 percent of their adjusted

gross income. This creates significant inequity with many private

sector and Federal workers, many of whom already enjoy tax exemptions for health and dental premiums through employer-sponsored health benefit cafeteria plans. Since 2000, OPM has offered

current Federal employees pre-tax benefits under the Federal

Flexible Benefits Plan, called FedFlex.

This year the gap between military and Federal employee benefits will widen even further. OPM will soon expand FedFlex by offering the option to enroll in flexible spending accounts [FSAs].

Federal employees will soon enjoy even greater benefits covering

additional out of pocket costs.

MOAA firmly believes that military beneficiaries are Federal employees too and should be able to enjoy the same equal tax relief

regarding their health care expenses.

A survey of private sector employees conducted last year by the

Society for Human Resource Management shows that 69 percent of

the private sector organizations surveyed offer flexible medical

spending account benefits. Even my employer, MOAA, a private,

non-profit organization with less than 100 employees, offers the

premium conversion benefit. If MOAA can provide this benefit to

95 employees to maximize employee benefits, why cannot the FedVerDate 11-MAY-2000 10:19 Nov 20, 2003 Jkt 000000 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 D:\DOCS\89968.TXT HGOVREF1 PsN: HGOVREF1
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eral Government provide the same benefit for those who currently

serve or those who have served their Nation in uniform?

As DOD competes with the private sector in the ‘‘war for talent,’’

premium conversion can offer a valuable recruitment and retention

tool. DOD is challenged to search for new ways to attract qualified

candidates away from the private sector to choose military service,

as well as to enhance retention.

Compensation issues continue to be of concern to our military

families. Pay and benefit improvements are integral to retaining a

top quality all-volunteer force to wage the war against terrorism at

home and abroad. The stresses of military life along with the recent increase in operations tempo associated with fighting two wars

since September 11 are taking their toll on military families. Sacrifices are taken for granted as a part of the military life. However,

in response to the hardships we impose upon our military families,

it is important that every attempt is made to provide them with

a quality of life that is competitive with the private sector.

MOAA firmly believes that sailors, soldiers, airmen, and marines

who sacrifice so much in service to their country are also Federal

employees in every way and deserve to be afforded the same tax

relief for their health care premiums as current Federal workers.

It is most unfortunate that Federal annuitants are prohibited

from participating in FedFlex. Both military retirees and Federal

annuitants also bear the burden of increasingly high premiums.

One example of where military retirees would greatly benefit concerns the TRICARE Retiree Dental Program.

One of the greatest complaints we hear from our retiree members

is the high cost of the retiree dental program. Unlike the active

duty dental program, the Government does not subsidize retiree

premiums, a significant dissatisfier for retired beneficiaries. While

the program is clearly successful, participation could be greatly enhanced by offering premium conversion to offset the high costs of

the program.

MOAA strongly supports enactment of this legislation to correct

this significant inequity in the tax code affecting the military. Rising health care costs affect all Federal employees, civilian or uniformed, active or retired, and this proposal is essential to ensure

all are provided similar relief.

Our hope is that the precedent set in 2000 for currently serving

Federal civilian employees will pave the way to ensure equal treatment for all military and Federal personnel.

Madam Chairman, I look forward to answering your questions.

And thank you again for this opportunity.

[The prepared statement of Ms. Schwartz follows:]

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Mrs. DAVIS OF VIRGINIA. Thank you, Ms. Schwartz.

And finally, last, but not least, I would like to welcome William

Young, president of the National Association of Letter Carriers. I

want to thank you for being with us today. And you are on.

Mr. YOUNG. Thank you very much, Chairwoman Davis, for this

opportunity to testify before the Civil Service and Agency Organization Subcommittee. I would like to mention that appearing with

me today is our director of retirees, Don Southern. I have two of

my national trustees here, Randy Keller and Danny Rupp. And

last, but not least, I have the president emeritus of the National

Association of Letter Carriers, Vincent R. Sombrotto, who is here

because he has a personal stake as a retiree. This legislation would

affect him personally, and he is over here to make sure that I do

not say anything to mess it up for him. [Laughter.]

I am here representing the nearly 305,000 members of the National Association of Letter Carriers. One of the great strengths of

our organization is that a large number of our retirees, some

86,000, are also members of our union. At the outset, I would like

to thank you, Madam Chair, for your leadership on another issue,

protecting the prescription drug benefits of retirees enrolled in the

Federal Employees Health Benefits Program. As you are quoted as

saying in this morning’s Washington Post, ‘‘This is an issue of the

Federal Government leading by example.’’ I could not agree with

you more. And that is why I am here with you today to support

premium conversion for retirees, because this, too, is an issue

where the Federal Government can lead by example.

Most of our retired members, some 63,000, in fact, are also enrolled in the NALC’s Health Benefit Plan, which provides a comprehensive package of health benefit insurance. As you know,

NALC HBP is part of the Federal Employees Health Benefits Program.

In October 2000, premium conversion for Federal employees

went into effect, enabling them to take advantage of a benefit that

was already available to active letter carriers. The NALC takes

great pride in having been a leader in establishing premium conversion within the Federal community. Thanks to the collective

bargaining process in place for postal employees, we were able to

establish premium conversion for our active members nearly a decade before it became available to the rest of the Federal work force.

Over that time, this bargained for contractual provision has

saved active letter carriers throughout the country millions of dollars. I would like to commend you, Madam Chair, as well as Chairman Tom Davis and Senator John Warner for leading the effort to

expand this benefit to include retirees. H.R. 1231, which has more

than 280 cosponsors, will allow Federal civilian, military, and postal retirees to pay health insurance premiums on a pre-tax basis.

This will provide significant out of pocket savings to these individuals.

As a general rule, letter carriers are a healthy group. The physical demands of delivering the Nation’s mail inherently supports a

healthy lifestyle. At the same time, a full career of walking the

streets and battling the elements every day also presents our retirees with some unique and very physical challenges. Thank goodness our members can rely on a comprehensive and affordable

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health plan to take care of their needs during their hard-earned retirement.

Like many of the Nation’s retirees, our members often confront

some difficult financial decisions. In addition, as Federal retirees,

many of our members are faced with obstacles unique to the Federal and postal community such as the Windfall Elimination Provision and the Government Offset Provision which deprive Civil

Service retirees of earned benefits. That makes it even more difficult for them when it comes time to pay for health insurance premiums.

To give you an idea of how helpful H.R. 1231 would be to our

retired members, consider the case of a new annuitant with 30

years of service under CSRS. That annuitant will qualify for an annual annuity of approximately $24,000 a year, which is worth

$20,400 after Federal taxes at the 15 percent tax bracket. If the annuitant is a union member and is enrolled in the NALC health

plan, he or she must pay premiums worth more than 10 percent

of their after-tax annuity income, some $2,300 a year, for family

coverage. This proposal would save that retired letter carrier $345

each and every year. Now that may not sound like a lot, but to people who must live on a modest fixed income in the face of escalating health care costs and rising premiums, such savings are not insignificant.

Premium conversion has been a win-win for active letter carriers,

both in demonstrating the value of collective bargaining which established it and for the resulting savings which have enabled letter

carriers to pump millions of dollars back into the economy. We are

grateful that you, Chairwoman Davis, recognize the importance of

expanding premium conversion to include all Federal retirees. We

look forward to working with you, Ranking Member Davis, and the

members of this subcommittee to see that it becomes law. Thank

you very much.

[The prepared statement of Mr. Young follows:]

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Mrs. DAVIS OF VIRGINIA. Thank you, Mr. Young. And thank you

to all of our panelists.

I would like to recognize my colleague from Maryland who has

joined us, Mr. Van Hollen, to see if you have an opening statement

you would like to make.

Mr. VAN HOLLEN. Just a very short remark, thank you, Madam

Chairwoman. Let me thank the witnesses for their testimony. I

want to thank you, Madam Chairwoman, for your leadership on

this important issue which, as we heard from the testimony of Mr.

Young, is very important to retired Federal employees. I represent

an area, the Eighth Congressional District in Maryland, that has

lots of current Federal employees and lots of retired Federal employees, and I can tell you this is something I hear about whenever

I talk to them. You are right, it may not be a huge amount, but

for people who are retired on fixed incomes it can mean quite a lot.

So I want to thank you, Madam Chairwoman, and I also want to

thank the chairman of the full committee, Congressman Tom

Davis, for his leadership on this issue. I am proud to be a cosponsor

of this legislation and I look forward to its hopefully speedy passage.

I would also like to say I want to thank you and the chairwoman

of the committee for your quick leadership: I was pleased to join

with you in this effort to make sure that the bill we just passed

with respect to prescription drug coverage for people on Medicare

did not inadvertently hurt our Federal retirees. We may have big

differences on whether or not we thought the bill was otherwise a

good idea, but, clearly, we all agreed on the fact that whatever the

merits of the underlying bill, we did not want it to harm Federal

employees. And so I appreciate the bipartisan consensus on that.

Thank you, Madam Chairwoman.

Mrs. DAVIS OF VIRGINIA. Thank you, Mr. Van Hollen. And I want

to thank you for joining in and supporting our Federal retirees and

our active military and military retirees.

I am going to start with a few questions, if you will put me on

a timer for 5 minutes, then I will go to you, Mr. Van Hollen.

I do not think we are going to be able to change the IRS’ mind

about premium conversion for retirees unless we enact this legislation. I have to say that the current tax policy is just too hit and

miss to make sense to me. I do not understand it, but I am not an

accountant either. The law says that if an employer sets up a cafeteria plan, then health insurance premiums can be pre-tax. But if

the same employer does not want to go to the administrative expense of setting up the cafeteria plan, then the same health insurance premiums are not pre-tax. And then when a person retires,

as you pointed out in your testimony, those same health insurance

premiums are never pre-tax. And if a person is not employed and

has to pay for health insurance out of his or her own pocket, that

is not pre-tax either. The situation cannot possibly make sense to

taxpayers and, as I said, it does not make sense to me. I think it

is time for a change in this system and I do not see any reason why

we should not start with our Federal civilian and military retirees.

With the rapidly growing cost of health care premiums, would

you not say that Federal civilian and military retirees as a group

are facing an uphill battle in being able to afford their health care

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needs? Anybody want to comment on that? I think you all probably

did in your testimony. It seemed to me, and correct me if I am

wrong, but that your increase in your COLA was less than the cost

of the increase in the health care; was that about right?

Mr. FALLIS. Just about the same. If you take the average COLA

for last year, it is $26 a month. And plans like the Blue Cross/Blue

Shield’s standard option was I believe $22.52 a month.

Mrs. DAVIS OF VIRGINIA. So you netted about $3.50 a month increase?

Mr. FALLIS. That is right.

Mrs. DAVIS OF VIRGINIA. Do you have any examples of anything

that you brought with you that your members would like to share

from each of your organizations, anything to put in the record to

help here?

Mr. FALLIS. I think our membership in NARFE, of course, is

speaking with one voice on this. No member of NARFE has premium conversion. We think it is terribly unfair. Quite frankly, I believe with a little compassion and understanding, the IRS could

have come up with a different solution here. I do not really truly

see our retirement plan is what they call a ‘‘qualified plan.’’ They

indicate ‘‘qualified plans’’ are not included in this. But if you take

a situation where in a qualified plan a 40 year-old worker leaves

employment in the private sector where there is a retirement fund,

that employee is allowed to take not only his or her contributions,

but those that are made by the firm or the company or whatever.

That is quite different in the Federal Government. When one

leaves Government service he or she is not allowed to take anything other than his or her own contributions. And so I think that

alone makes it different from what we would call a ‘‘qualified plan.’’

So, yes, I believe that it could be done; probably will not be. But

I think the IRS could have given us a better decision and have

avoided all of this.

Mrs. DAVIS OF VIRGINIA. I think that would have been the easier

way to go. But, quite frankly, I do not think it is going to be the

way. Unless we do the legislation, I do not think it is going to happen.

Ms. SCHWARTZ. Madam Chair, may I add one other.

Mrs. DAVIS OF VIRGINIA. Certainly.

Ms. SCHWARTZ. There is also a very deserving group of beneficiaries within DOD, and those are our Guardsmen and Reservists

who do so much for our Nation. And within the TRICARE program,

their dental premiums are not subsidized by the Federal Government, just as the retiree premiums are not. And there has been a

real problem with dental readiness for the Guardsmen and Reservists because it is very expensive for them to buy into this program.

If we were able to get the premium conversion benefit for our

Guardsmen and Reservists, it would give a significant tax break for

them and maybe make them better able to afford the program.

Many Guardsmen and Reservists could not deploy because their

dental readiness was not adequate. So I think that is a group that

really would benefit from this, and we appreciate the subcommittee

helping them out as well.

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Mrs. DAVIS OF VIRGINIA. Certainly, our Guardsmen and Reservists have been very active in the last year. They are doing yeoman’s

work and we could not be doing it without them.

Ms. SCHWARTZ. Yes. Right. Thank you.

Mrs. DAVIS OF VIRGINIA. Mr. Young.

Mr. YOUNG. Madam Chairwoman, I bring a rather unique view

to this because, as I said in my testimony, all of the active members that I represent, which is the majority of the 305,000 number,

already have pre-tax because the employer that we work for, the

U.S. Postal Service, was able to administer a cafeteria plan. To us,

to the letter carriers, it is a basic issue of fairness. It is just not

fair the way it is set up right now. What it boils down to to me

is that one group of employees I represent, the actives, they have

a voice. At the bargaining table, I am able, or whoever the president is at the time, is able to speak on their behalf. What has happened to our retirees is, to be honest with you, they have no voice.

And you have moved way up in their charts, I can tell you that,

and the other people that support this, and I mean that sincerely,

because for all practical purposes you are their voice, their only

voice.

And so I hope that the issue of fairness surfaces here and that

people understand. Like I said, for most of the people I represent,

we have it. But it is not fair, it really is not. And it is even more

unfair when you add into the equation that the people who can afford to take the hit the least are the very ones that are being asked

to absorb it. And so I would ask the committee to keep their mind

on the issue of fairness as they deal with this, because the way it

is set up it is just not right, it is not fair.

Mrs. DAVIS OF VIRGINIA. Thank you, Mr. Young.

I am going to yield to my colleague from Maryland, Mr. Van

Hollen, for questions.

Mr. VAN HOLLEN. Thank you, Madam Chairwoman. I do not

have a lot to add. I think that is a very important point you raised,

Mr. Young, with respect to fairness. I am ready to vote on this. My

only question is when. I do not know when we are scheduled to

vote on this as a subcommittee or a full committee. But, really, I

do not have any questions. As I said, I am a cosponsor of this bill.

It is an issue I have talked about on many occasions within my

congressional district. So I appreciate your all being here today.

And, again, thank you for your leadership.

Mrs. DAVIS OF VIRGINIA. Mr. Van Hollen, you are going to get

your chance to vote on it next Wednesday, I believe. It is the 16th,

whatever day that falls on.

Mr. VAN HOLLEN. Terrific. That is great.

Mrs. DAVIS OF VIRGINIA. We will be having a mark-up. We are

having a hearing that day and I believe the markup is going to be

right after the hearing. So I would certainly appreciate it if you

were there and can vote.

Mr. VAN HOLLEN. All right. Thank you.

Mrs. DAVIS OF VIRGINIA. But we do plan on bringing it up for a

markup next Wednesday. And then I would assume our chairman

of the full committee, Mr. Davis, would bring it to the full committee very quickly. And then, of course, as you know, it would probVerDate 11-MAY-2000 10:19 Nov 20, 2003 Jkt 000000 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 D:\DOCS\89968.TXT HGOVREF1 PsN: HGOVREF1
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ably have to go over to Ways and Means after that. And that is

where you are going to have to work. [Laughter.]

Where we are going to have to work. But we certainly have the

cosponsors, the people who are behind you on it. I mean, 283 cosponsors is more than what we need to pass it on the House floor.

So we just have to get it out of the committee and get it out there

to the floor.

I do not have any further questions. But I do appreciate your

taking the time to come and get all this on the record so that we

can take the bill forward and try and do what I believe is fair and

equitable to all people. I think the biggest argument for it, Mr.

Fallis, and I think you are the one who said it, is think of the poor

man or woman who is sitting here an active employee right now,

they retire and they get a big hit in their paycheck. It is like they

get a demotion.

Mr. FALLIS. Retirees are fast becoming known as the stepchildren of the Federal community.

Mrs. DAVIS OF VIRGINIA. Well, we appreciate all the service that

our retirees have given us. And I appreciate all the service that our

active men and women in the military are giving us right now. My

heart is with them. Thank you, Mr. Young. My sister-in-law was

a postmaster for many years. I know that is not a letter carrier,

but——

Mr. YOUNG. Close enough.

Mrs. DAVIS OF VIRGINIA. Close enough, yes. Thank you all for

coming.

And with that, the hearing is adjourned.

[Whereupon, at 3 p.m., the subcommittee was adjourned, to reconvene at the call of the Chair.]

[The prepared statement of Hon. Danny K. Davis follows:]

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